History, Class and the European Debt Crisis

Written by John Schmitt

Monday, 22 August 2011 12:25

Unless European officials can find a viable solution soon, the continent's sovereign debt crisis threatens to derail the increasingly fragile world economic recovery. The conventional wisdom blames Greece, Portugal, Spain and Ireland — the poorer “peripheral" countries at the center of the crisis — for “living beyond their means.” In an important new paper, however, Vicente Navarro, professor of public policy at Johns Hopkins University, offers a compelling alternative explanation for the mess.

Navarro observes that for much of the postwar period all four of these countries were largely ruled by right-wing regimes, including military dictatorships in the case of Greece, Portugal and Spain. In Navarro’s view, today’s sovereign debt crisis has its roots in this authoritarian history, which produced weak welfare states relative to the rest of Europe, and, even more importantly, left all four countries with woefully underdeveloped tax systems that are the real source of the squeeze on sovereign debt.

As Navarro notes, tax revenues in Greece, Portugal, Spain and Ireland are low: "approximately 34% of GNP in Spain, 37% in Greece, 39% in Portugal, and 34% in Ireland, compared with the EU-15 average of 44%, and...54% in Sweden." He continues:

"The super-rich, rich, and high-income upper middle classes do not pay taxes at the same level and intensity as those in most of the central and northern EU-15 countries – a consequence of a history of government by ultra-right-wing parties. Of course, progress has been made since the dictatorships ended. But the dominance of conservative forces in the political and civil lives of these countries explains why their state revenues are still so low."

In fact, using as a benchmark the experience of other European economies that have avoided a sovereign debt crisis, none of these four countries is living beyond its means,: “In Spain, for example, the GNP per capita is 94% of the EU-15 average, but public social expenditure per capita is only 72% of the EU-15 average.”

The essay concludes with a set of alternative political and economic solutions to the debt crisis. A key component is increasing the size and progressivity of tax revenues in the countries in crisis. Other crucial components are a European-wide fiscal expansion and programs of direct job creation in areas where unemployment remains stubbornly high.

As Navarro argues: “The problem of the public debt is thus basically a political, not an economic or financial one.”